Cru Cabinets is considering the purchase of a new machine costing $40000 with an
ID: 2454403 • Letter: C
Question
Cru Cabinets is considering the purchase of a new machine costing $40000 with an expected 10-year life and no salvage value. the production supervisor has determined that the new machine will increase cash flow by $8000 per year for 10 year. The CFO indicates that the minimum rate of return for a new asset is 12%. you pull out your accounting papers and find the following two rates in your notebook:
Present value of an amount,10 years 12% 0.3855
Present value of an annuity, 10 years 12% 6.1466
Which statement is TRUE about purchasing the machine? ingore income taxes.
a. the purchase is a bad idea, losing $1854 each year
b. the purchase is a good idea with a net present value of $9172
c. The purchase is breakeven, we should discuss qualitative issues.
d. there is not enough information provided to make a recommendation
Explanation / Answer
Answer : b - the purchase is a good idea with a net present value of $ 9172. Year CF PVF @ 12% PV 0 -40000 -$40,000.00 1-10 $8,000 6.1466 $49,172.80 NPV $9,172.80
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